Are we heading for “same old, same old” for the proposed Tripartite FTA Rules of Origin?

28 October 2014

SADC, COMESA and EAC comprise 26 Southern and East African Countries currently negotiating a comprehensive tripartite FTA with new preferential origin rules.

 

The SADC-COMESA-EAC Tripartite Free Trade Area (TFTA) was formally launched at a summit in Johannesburg, South Africa, in June 2011. This followed a Tripartite Summit in Uganda in 2008 where the heads of State and Government of the respective regional economic communities (RECs) agreed on a “programme of harmonization of trading arrangements amongst the three RECs, free movement of business persons, joint implementation of inter-regional infrastructure programmes as well as institutional arrangements on the basis of which the three RECs would foster cooperation”[1].

 

The comprehensive TFTA would be negotiated in tranches, with market access forming part of the first 3-year tranche.  This self-imposed deadline has come and gone, with significant progress made on market access offers and in other areas.

 

Rules of Origin (RoO) are the regulations that specify the level of local processing of materials and goods, where these contain imported content, that must be undertaken in order to earn local origin status, and thus qualify for trade preferences. With so much at stake – since RoO count among the critical fine-print that defines trade liberalisation at a practical level – this aspect of the negotiations was always going to be fraught with challenges. Key amongst them is the fact that each of the respective RECs apply their own set of origin rules, notwithstanding a frequent misperception that two of the RECs (COMESA and EAC, with overlapping membership) already employ the same rules.

 

Towards a common TFTA RoO standard

 

In order to give effect to the notion of a preferential trade area, the regions will have to adopt a common RoO standard. In this respect, history is not particularly kind, given that the SADC FTA RoO negotiations took a decade to complete (exceptions remain), having switched to a line-by-line approach under the Amended Trade Protocol. SADC adopted the “European style” RoO, similar to what South Africa already had in its bilateral agreement with the EU, and which the other partner states already knew from the EU GSP and Cotonou arrangements. This ‘new’ model has implications for the TFTA negotiations, as it significantly increases the areas of divergence with COMESA and EAC rules.

 

TFTA negotiations are conducted through the Tripartite Trade Negotiations Forum (TTNF), with specific technical areas being dealt with by Technical Working Groups (TWG), for example on RoO (the RoO TWG had met seven times as of August 2014), the TWG on trade remedies, the TWG on customs cooperation and so forth. Given the substantial differences between the respective REC RoO, and the sensitivities around RoO, the TWG adopted a somewhat practical approach, involving an audit of the respective RoO instruments and drawing up three matrices identifying cases where the product-specific rules (also known as the ‘list rules’) are substantively the same across the RECs, instances where they are similar, and those where they are different.  Given the complexities involved in achieving a common outcome, and the pace of the negotiations, it was agreed in the TTNF not to re-open negotiations in those categories where ‘common or identical’ rules exist. These commonalities would thus represent a low hanging fruit, so to speak, to cover at least some product categories when the trade agreement launches.

 

This exercise resulted in 15 percent of tariff headings being identified as having common rules – not necessarily verbatim but to equal effect. An additional 29 percent were found to have ‘similar’ rules. More than half of the rules were found to be different (in other words neither common nor similar) across the RECs, implying that common rules would need to be negotiated on a line-by-line basis in these instances. This has not happened yet but indications are that the process could begin in earnest later in 2014 at the next TWG meetings.

 

Without doubt, this is a daunting process not only given the divergent economic offensive and defensive interests within the 26-member TFTA group and the different levels of development, but also from an entirely different perspective: This involves negotiations

 

(a) that are often highly technical in nature and therefore demanding on the officials tasked with negotiations (along with the fact that there is often personnel change among officials, which risks undermining continuity);

 

(b) that by nature (should) require broad national consultations and scenario planning to derive informed positions;

 

(c) whose outcomes and implications are often difficult to measure or predict; and

 

(d) which potentially impede on current or future policy space, often leading to reservations or intense caution among those involved in the negotiation process. 

 

What progress thus far?

 

Essentially, the focus to date has been both on the RoO audit (the ‘matrices’), broad agreement on how to deal with the common rules, and on the RoO Protocol. This text – the main RoO Protocol - comprises the general RoO clauses representing the overall framework, dealing with important principles such as cumulation, certification, principles and definitions of what constitutes “wholly produced”, simple (or insufficient) processing, aspects around fisheries (definition of vessels, ownership and registration criteria), agreement on the type of competent authorities tasked with administering origin certification, and so forth.

 

Notable (albeit expected) early outcomes include provisions for full cumulation among TFTA member states, thus allowing joint compliance with the respective origin requirements among Member States, an aspect that reduces the individual burden of compliance and which is a common feature among preferential trade agreements.

 

While these developments represent headway towards a TFTA that significantly liberalises trade between Member States and is an important stepping stone in relation to a continental FTA, they might represent relatively little practical benefit to traders and other stakeholders within the region initially. This is notwithstanding the recently agreed roadmap, which proposes signature on at least a partial FTA and agreement on the remaining processes of ratification at the Third Tripartite Summit later this year (with formal launch of the TFTA early in 2015).  

 

The crux for traders however is to what extent tariff liberalisation offers have been agreed and concluded, what is considered ‘sensitive’ and thus excluded from liberalisation, and what the RoO will look like. This process, concerning more than half of the applicable RoO, will no doubt be a difficult and likely time-consuming task.  

 

For example, in terms of the design of RoO, how will countries weigh up local development needs and possible incentives for local production against competing interests in neighbouring countries? What will textile RoO look like, when some countries – as has historically been the case - seek to protect upstream cotton (and to a far lesser extent fabric production) by in effect barring an outcome that would see producers being able to tap into global supply chains for competitive (in terms of price, quality and variety) fabric and yarn to ensure competitive local manufacture of garments? How will say coffee bean or tobacco leaf interests weigh against the needs for some flexibility of downstream beneficiation activities?

 

How will potentially protectionist leanings by say more industrialised Member States (with greater vested interests relating to established industries) reconcile with those countries that would benefit from greater flexibility? Questions like these raise the all-important issue of development in the TFTA and the role that RoO can, or indeed should, play. The evidence whereby highly restrictive RoO induce development is tenuous, especially within an environment of decreasing tariff barriers (in a sense the counterweight to restrictive rules), which raises the question to what extent ‘development’ should even be considered as something for which RoO are an ‘appropriate’ tool, and to what degree they should carry the burden of responsibility for this.

 

In that regard, how do we even begin to define ‘development’ in the RoO context? Is a set of (RoO) criteria, designed to induce local economic activities in the hope that a “captive” downstream sector will later utilise these supplies for further beneficiation, a realistic outcome that leads to development? Will these (final) products still be internationally competitive in the respective export market? Or can it not be accepted as realistic that development may more likely flow from “development-friendly” rules where the incentive is provided by flexibility in sourcing (since this is attractive to producers of intermediate and final goods), given that producers would in any case most likely (still) chose local supplies over imports if these are competitive, irrespective of RoO? It is critical not to overlook the link between restrictions that protect upstream suppliers or impose heavy local processing requirements, and the ultimate objective of final goods being able to still compete in the export market. 

 

There is little doubt that rules that simply mitigate (or avoid) the risk of trade deflection and transshipment will often not lead to significant benefits under a preferential trade framework. The regional evidence in TFTA points to relatively low levels of intra-regional trade.

 

While a good overall balance between these somewhat opposing approaches to RoO is desirable, this will likely remain a challenging task in the broader TFTA context. Given the complexities of RoO negotiations, and the task of doing this for such an extensive list of products currently subject to dissimilar rules within the respective RECs, it may be worthwhile to focus less – perhaps – on the line-by-line negotiations with all its complexities, but rather to ensure first and foremost that mechanisms are agreed that will reduce the effective restrictiveness and compliance burden of the RoO outcome. Specifically, this means a strong focus on extensive and full cumulation among Member States, but also mechanisms for administrative cooperation between all customs bodies and border agencies, to ensure smooth passage for regionally traded goods and agreed instruments to ensure efficient cooperation on the enforcement side.

 

At a practical level, this could involve a number of features, including:

 

  • A common free-standing instrument on administrative cooperation on all RoO matters and signed by all parties (rather than bilateral arrangements), to ensure seamless application and respect for the principle of cumulation.

     

  • Comprehensive and ongoing training and capacity building programs for RoO ‘operators’ (both within customs agencies and private sector) and a priority focus on trade facilitation.

 

  • A facility such as the Binding Origin Information (BOI) certification, currently available for imports into to the European Union, which could give operators greater long-term certainty through an advanced and binding ruling on the origin status of their goods, usable throughout the TFTA region and respected at each border.

 

  • A RoO “helpdesk”, specifically to assist regional operators and customs bodies on technical matters relating to the interpretation of rules (or resolution of RoO-related disputes), could potentially play an important role in facilitating and growing regional trade under TFTA preferences. Inconsistent application and adjudication of the rules has been an issue afflicting operators throughout the TFTA region, imposing significant yet avoidable costs on traders and creating uncertainty.           

 

Conclusion

 

It is worth recalling that it is primarily individuals and firms, not States, which trade with each other and who are the ultimate beneficiaries of RoO. It is they who carry the burden, or enjoy the practical benefits, of regional trade preferences and the associated RoO criteria. While is known that limited consultation between private sector stakeholders and government negotiators does take place, there is an overriding sense that this is not necessarily so throughout the TFTA region and positions are often developed by second-guessing what might be a desirable (and desired) outcome.  The TFTA process offers the opportunity of a RoO outcome that deals with some of the challenges and at times highly restrictive practices of the past. A little bit of thinking outside the box here and there may be some of the tonic that is needed during the next phase of negotiations.

Author: Eckart Naumann is a consultant economist, and Associate of the Trade Law Centre (TRALAC).


[1]  Final Communique of the COMESA-EAC-SADC summit of heads of State and Government. Kampala, 22 October 2008.  [Online] tinyurl.com/ls6khxe

 

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